An introduction to the ABLE Act of 2014 and ABLE accounts – how they work and why they're important.
The ABLE Act – formally, the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014 – was created to give individuals with disabilities and their families the opportunity to save for the future without limiting access to critical income, healthcare, food or housing assistance programs.
Before the bill was introduced, eligibility for these programs was limited to individuals who reported no more than $2,000 in cash savings, retirement funds or other substantial items of value. With the ABLE Act, they've made great strides.
The act amends Section 529 to create a tax-free savings account, similar to 529 college savings plans, that enables individuals to save without affecting their eligibility for Social Security Income, Medicare or similar programs.1 Contributions to the account are not tax deductible, but funds can grow tax-deferred inside the account and distributions made to cover “qualified disability expenses” – including medical and dental care, education and training, housing, and transportation – are tax-free.
Individuals are eligible for ABLE accounts if they:
The ABLE account owner must be the qualified individual and the account beneficiary. Each eligible individual can only have one account.
Anyone can contribute to an ABLE account. Generally, contributions may not exceed the amount of the annual gift tax exclusion for that tax year. For 2017, that amount is $14,000 and may be adjusted annually for inflation.3 However, each plan has a maximum contribution or limit2, and regulations specify that any amount contributed in excess of the annual gift tax exclusion must be returned to the contributor. As with 529 plans, some states may offer a state income tax benefit for using the individual's home state plan.
As noted earlier, distributions from an ABLE account are tax-free if the money is used to pay for qualified disability expenses. Any amounts distributed in excess of those used to cover qualified expenses must be included in the individual's taxable income and will be subject to a 10% penalty. The 10% penalty will not apply if the distribution is on or after the death of the account beneficiary.
While the ABLE Act has passed at the federal level, it is up to the states to pass their own ABLE bills. If it does not offer its own program, a state may choose to contract with another state to offer its eligible individuals the opportunity to open ABLE accounts. The new Protecting Americans against Tax Hikes (PATH) Act passed in December 2015 allows consumers to select a plan sponsored by any state, making it possible for people to select a plan that is best suited to their needs.
When it comes to addressing the long-term cost of living with a disability, ABLE accounts do have some limitations, including restrictions on the size of contributions and the Medicaid payback provision.4 So, ABLE accounts may be a good supplement, but not necessarily a replacement, to a special needs trust.
Please note, ABLE plans are not currently available through financial advisors and can only be purchased directly through the state. However, your financial advisor can help provide more information on ABLE accounts and other ways to plan for a loved one's long-term needs.
1ABLE account balances over $100,000 are counted in means or resource tests and may result in the suspension of eligibility for Social Security Income benefits during any period in which the excess remains in the ABLE account.
2Dependent on legislation of the state in which the account is established.
3There is no opportunity for five-year forwarding for gift tax purposes.
4If the beneficiary's resident state paid for the beneficiary's Medicaid costs incurred after the account was opened, that state receives reimbursement of the balance of the account upon the beneficiary's death.
The information contained within this document has been obtained from sources considered reliable, but Raymond James does not guarantee the foregoing material is accurate or complete. You should discuss any tax or legal matters with the appropriate professional.